![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Emerging Asian markets question one-size-fits-all bank rules
Nations such as the Philippines seek a more proportionate approach to level the playing field with global lenders
The noise generated by divisions between Europe and the US over the implementation of a global bank rule tends to deflect attention from Asia, a region that could ultimately benefit from a more customised approach.
Asian regulators, who have typically been rule-takers over the past nine years, need to strike an appropriate balance between risk reduction and credit availability to meet the long-term funding needs of small- to medium-sized companies, trade and infrastructure, and allow financial markets to develop.
Countries in the region, while not responsible for the 2008 global financial crisis, have more or less committed to implementing regulatory reforms in full, even though some are not particularly appropriate to regional banks.
In many cases, Asian banks have consistently operated with less leverage than their western peers, so higher Basel capital requirements do not pose a challenge. But the sophisticated models on which the large, advanced banks assess their risks and calibrate their capital charges are less relevant for emerging market banks, many of whom are local lenders that are not too big to fail.
Ephyro Amatong, a commissioner at the Philippine Securities and Exchange Commission, said at the Asia Risk Congress in September: “It’s one thing, post the 2008 crisis, to come up with reforms for markets that are already established, but for jurisdictions like the Philippines, where capital markets are growing, it’s a challenge to implement the standards that have been set.”
“We are not talking about repeal, we are not talking about deviation from the financial framework – we are talking about implementing it better. Maybe [by being] more proportionate to the state of where your market is,” he added.
Clearly, it is not necessary to impose the same kind of capital charges on locally active banks as on globally systemic ones. The collapse of these local lenders will not pose a threat to either the regional or global financial system, and smaller banks cannot afford the vast risk departments of their global peers.
Moreover, Asian jurisdictions need room to expand the depth of their markets in a region where businesses are often underserved by financial institutions.
The ratio of credit provided by the domestic financial sector is less than 100% of the gross domestic product in Cambodia, India, Indonesia, Myanmar and the Philippines, according to the World Bank. In developed countries, the ratio is typically around 200% of GDP.
It is probably a good time for Asia to raise its voice and tweak the rules
That’s not all. The face value of corporate bonds outstanding is below 10% of GDP in Indonesia, the Philippines and Vietnam – countries with a combined population of roughly 460 million. And the secondary markets for both government and corporate bonds tend to lack liquidity in most southeast Asian countries.
While the Basel Committee on Banking Supervision has largely shut the door on changes to global bank regulations that have already been agreed, it is probably a good time for Asia to raise its voice and tweak the rules, given there are multiple reviews around.
The Financial Stability Board, the financial regulatory arm of the Group of 20 nations, finalised plans in July for an evaluation of the post-crisis regulatory framework, in what is seen as an attempt to shore up an increasingly fragile consensus.
In the US, the Department of the Treasury has begun a comprehensive review of the country’s prudential and financial market regulations, as requested by President Donald Trump.
There is little evidence that post-crisis regulations have actually inhibited financial markets in the US and yet the government is overhauling those rules. In Asia, where regulators do see signs of the unsuitability of global rules to local institutions, a similar review would surely have even stronger justification.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Our take
Podcast: Lorenzo Ravagli on why the skew is for the many
JP Morgan quant proposes a unified framework for trading the volatility skew premium
Quants see promise in DeBerta’s untangled reading
Improved language models are able to grasp context better
Counterparty risk model links defaults to portfolio values
Fed’s Michael Pykhtin proposes using copula models to capture effects of margin calls on default risk
Does Basel’s internal loss multiplier add up?
As US agencies mull capital reforms, one regulator questions past losses as an indicator of future op risk
Is JSCC-CFTC stalemate about to be broken?
Japan CCP gains allies in battle to clear yen swaps for US clients, but CFTC shakeup could dash hopes
What T+1 risk? Dealers shake off FX concerns
Predictions of increased settlement risk and later-in-the-day trading have yet to materialise
Go your own way: departures pose new challenges for CFTC
Loss of Democratic majority would impede chairman’s ambitions for regulatory agenda
Altice’s dropdown is a warning for European creditors
Carve-out used to shield assets from lenders may occur in a fifth of European deals